Monday, August 28, 2006

Lou Simpson

“You live by the sword, you die by the sword. If you are right, you are going to add value. If you are going to add value, you are going to have to look different than the market. That means either being concentrated, or, if you are not concentrated in a number of issues, you are concentrated in types of businesses or industries.”
Lou Simpson, GEICO Insurance

In The Warren Buffett CEO, Robert P. Miles introduces Lou Simpson as Berkshire Hathaway’s (NYSE: BRKB) back-up capital allocator. Simpson operates very much under the radar and is in charge of equity investments at GEICO, one of Berkshire’s insurance businesses. He has an impeccable record. Indeed, it is all but a forgone conclusion that in Buffett’s absence, Simpson will be responsible for capital allocation at Berkshire.

It took a while to get through this book. There is a lot of repetition with praise for each of the CEO’s of the various subsidiaries and their admiration for their boss. But in my opinion, the real message to take away from this book is that Berkshire is an assembly of many wonderful businesses run by dedicated manager owners who love their job and their businesses. Of course there are some subsidiaries which may be in for tough times such as the various shoe manufacturers. But GEICO, Gen Re, Flight Safety, Executive Jet Aviation (NetJets), Washington Post (NYSE: WPO) and See’s Candies along with a few furniture retailers are top notch businesses. The book also gives you a good feel for the kinds of people and businesses Buffett looks for as well as a culture which he has created to last even once he is no longer at the helm. That is the power of Berkshire.

The chapter on Lou Simpson alone makes this a worthwhile read. His business tenets are listed by Miles as follows:

  1. Read company reports and financial press voraciously. He reads 5 to 8 hours a day. His favorites are the Wall Street Journal, BusinessWeek, Fortune, Forbes and Barron’s. All must reads.
  2. Research any company extensively before making an investment.
  3. Don’t overpay.
  4. Think independently.
  5. Invest for the long-term.
  6. Hold only a few stocks. He thinks individual investors should hold no more than 10 to 20 stocks. We have talked about this before.

Remember our discussion about value vs. growth last October? It seems Mr. Simpson agrees with us: “When you ask if someone is a value or growth investor – they are really joined at the hip. A value investor can be a growth investor because you are buying something that has above-average growth prospects and you are buying it at a discount to the economic value of the business.”

Since we are talking about equity investments at Berkshire, here is a quick update. During Q2, its positions in Gap, Lexmark and Outback Steakhouse appear to have been completely eliminated. The company also disclosed that during Q1, it accumulated a $117 million position in Johnson & Johnson (NYSE: JNJ) – a wonderful company which was trading at a reasonable price.

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